11 March 2017

League Tables

The concept of league tables probably emerged first in organised sport. However, it took some time before these would become arranged on the basis of clear criteria with an unarguable result at the end of the season. Cricket is one of the oldest team sports to be played with agreed laws but the concept of a championship with a clear champion took many years to appear.

In the 1870s newspapers started to print tables of inter-county results and then proclaim a champion based on their chosen criteria. One of these was “least matches lost” and this carried on even after an official championship was established when one point was awarded for a win but one was deducted for a defeat. This was discontinued after 1909 as it was deemed inherently unsatisfactory and a points per win method replaced it in 1910. The official championship was constituted at the meeting of club secretaries in December 1889 and started in 1891.

By then association football had already formed the Football League. The first full league season took place in 1889-90 and was organised on the principle that every club in the 12-club league would play every other club both home and away. Two points were awarded for a win and one point for a draw and there was a clear result. In fact in that first season it could not be clearer as Preston North End went unbeaten through the season as this first League Table shows:

This format has not changed much since. It is now common to award three points for a win rather than two and different methods have been used to decide the position in the event of a tie in total points. Sometimes goal average has been used, sometimes goal difference and in some sports relative performance between the affected clubs. In Rugby Union the idea of bonus points has been introduced, either for scoring four or more tries or for a losing side limiting the margin of loss. Such tinkering is usually intended to promote attractive play but the fundamentals don’t change. A League Table shows that in a closed competition all competitors played against each other a fixed number of times and points were awarded for results, not for other objective factors. The result is fixed, transparent and unarguable.

However, the concept of League Tables has since been applied in many other areas of public life with quite mixed results. Criteria are often subjective, timelines are not always fixed and the results are often anything but transparent. Let’s look first at Education.

Again it is newspapers that started the trend of publishing annual rankings of universities with the idea no doubt of helping students, their parents and teachers in helping them decide where they should apply. Over the years such rankings have been published by The Times, The Sunday Times, The Guardian, The Daily Telegraph and The Financial Times. Today there are three such rankings, The Complete University Guide, The Guardian and jointly by The Times and The Sunday Times.

Their criteria include entry standards, student satisfaction, staff student ratio, academic services and facilities expenditure per student, research quality, proportion of Firsts and 2:1s, completion rates and student destinations. Strength in individual subjects is also ranked.

Since 2008 Times Higher Education has compiled a “Table of Tables”. In the 2016 table the top five universities were the University of Cambridge, the University of Oxford, University of St Andrews, Imperial College London and Durham, University. To the casual observer this might seem as you would expect. Aren’t those what most people would judge as Britain’s best universities? And indeed my suspicion is that is how the criteria are decided and weighted - to give the newspaper reader the result they might expect. Oxford and Cambridge are our finest universities and they are at the top followed by newer but still well established and distinguished universities.

But there are also international rankings such as one published by US News and World Report and often there are massive disparities in such rankings. International rankings also consider the number of citations per faculty, the proportion of international staff and alumni prize winners.

The problem is that all of these league tables are using potentially objective criteria in a subjective way. Combined rankings then compare apples with oranges. The effect on the universities themselves can be very damaging as they may try to follow the league tables rather than sticking to their mission. A conspicuous criterion missing from the League Tables is that of Added Value, indeed most work against it. Added Value is where a University takes a student from a modest background with modest academic achievement but adds such value that they graduate with good degrees and take good graduate level jobs. At the University of Bedfordshire where I am now an Honorary Fellow but was a Governor for six years I would grapple with this issue as Chairman of the Marketing & Communications Committee, and later the Student Experience Committee. We could not ignore the League Tables, there was little other external evidence to differentiate the universities from each other, but our relatively low performance belied what we knew we delivered: exceptional added value, and better than Oxford or Cambridge. And I say that as an Oxford man.

League Tables are also used in Secondary Education but with a big difference. They are exclusively focused on results, which might seem a good thing, but again there are big dangers. The most familiar League Table will be that for GCSE results where 5,000 schools in England and Wales are ranked within each local education authority by the percentage of pupils gaining at least five A* to C grades including the key subjects of English and Maths. Surely that’s OK isn’t it?

But again the key factor of added value is ignored. A secondary school takes in a cohort of pupils from a number of primary schools in its catchment area. They will have been assessed at Key Stage Two and their Primary Schools will have also been ranked in League Tables accordingly. The best schools will not necessarily be the ones who get the highest number through GCSE but the ones who develop the pupils to the optimum level of their potential. Indeed by focusing on those likely to get A* to C in the requisite number of subjects head teachers may be tempted to put less attention on those who are unlikely to get such grades and put maximum attention on the ones who might just get there. All heads would deny it but it is a well-known truism that you get the behaviour you want by setting targets appropriately.

The use of League Tables in Economics is even more widespread but with even stranger results, perhaps because economics is not the precise science its exponents would like it to be. A very familiar ranking is that of the London Stock Exchange. Its listed companies are ranked every day in the Financial Times by order of their market value, that is the previous day’s share price multiplied by the number of shares at issue. All the companies are so ranked but the Table is divided into various indices, the most famous of which is the FTSE 100 Index. “The Financial Times Stock Exchange 100 share index is an average of share prices of the 100 largest, most actively traded companies on the London Stock Exchange. The FTSE 100 – or the Footsie, as you will sometimes see it written or pronounced – is an index that measures the performance of the shares of the 100 largest companies listed on the London Stock Exchange, sometimes referred to as the LSE. It measures the daily share price performance of those 100 firms.

Example: If the FTSE 100 is up, it means there are more people buying than selling and share prices have risen. Conversely, if more people are dumping shares the index goes down.“[i]

This highly simplistic definition comes from the Financial Times own website and I will not attempt here in my limited space to point out all its faults. I am more concerned with how it is used. To be fair to the FT they are only saying it’s a short term measure on trading. But the media report it as a bellwether for the economy. In the absence of daily rankings of the economy we get a daily update on the FTSE. The problem is that it is dominated by UK quoted multi-nationals whose earnings are diverse and often in US dollars. When the pound goes down, probably a sigh of UK economic weakness, the FTSE 100 goes up!

But at least the FTSE 100 does cover the largest companies by market capitalization. What about its equivalent on the New York Stock Exchange- the famous Dow Jones Index?

I would need to double the length of this blog to properly explain the Dow Jones Index but a brief summary: It was created and first calculated in 1896 by Wall Street Journal Editor Charles Dow. It shows how just 30 large publicly traded owned companies based in the US have traded during a standard trading session on the stock market. The average is price-weighted. The value of the Dow is not the actual average of the prices of its component stocks, as say the FTSE 100 is, but rather the sum of the component prices divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index. Since the divisor is less than one, the value of the index is larger than the sum of the component prices.

In case I’ve lost you let’s just look at some of the recent anomalies this has produced. As of December, 2016 Goldman Sachs and 3M are among the highest priced stocks in the average and therefore have the greatest influence on it. General Electric has one of the lowest priced stocks in the average and has one of the least amounts of sway in the price movement. The NYSE’s most valuable company Apple was only admitted to the Dow in March 2015. Obviously Apple should be in such an index but so should AT&T which it replaced. Its design encourages volatility. For example, during September-October 2008, former component AIG’s reverse split-adjusted stock price collapsed from $22.76 on September 8 to $1.35 on October 27; contributing to a roughly 3,000 point drop in the index. But few in the media would have explained that at the time and most people would just have assumed a much wider problem in the economy encouraging them to sell.

But if League Tables designed to describe corporate performance are deeply flawed our measurement of comparative national performance is even worse. Step forward GDP.

The OECD defines Gross Domestic Product as “an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs). An IMF publication states that “GDP measures the monetary value of final goods and services – that is, those that are bought by the final user – produced in a country in a given period of time (say a quarter or a year).

The basic concept was first developed to defend landlords against unfair taxation during warfare between the Dutch and the English between 1652 and 1674. The modern concept was first developed for a US Congress report in 1934 and then after the Bretton Woods conference in 1944, GDP became the main tool for measuring a country’s economy. At that time gross national product (GNP) was the preferred estimate, which differed from GDP in that it measured production by a country’s citizens at home and abroad, but gradually GDP became the standard, perhaps because it takes longer to include overseas earnings.

As we have seen with other League Tables we are attempting to compare not just apples and oranges, but a whole basket of fruit. The value added by firms is relatively easy to calculate from their accounts and has become easier with the development of Value Added Tax in many domains. But the value added by the public sector, by financial industries, and by intangible asset creation is more complex. In the words of one academic economist “The actual number for GDP is therefore the product of a vast patchwork of statistics and a complicated set of processes carried out on the raw data to fit them to the conceptual framework.”[ii]

But while there are many problems in calculating GDP my main objections are two. Firstly is the treatment of public expenditure. All public expenditure, whether financed by taxation or borrowings, is included in GDP. Thus while the dreadful Gordon Brown was Chancellor of the Exchequer he not only claimed he had abolished "boom and bust” but he also dramatically increased public expenditure, thus expanding GDP, while massively increasing the size of the deficit and the national debt. We may get control of the deficit one day but there is no chance of paying off the national debt unless we write it off or institute colossal rates of inflation.

My second objection is the way it is used. Because (in 2016) the United Kingdom is listed fifth in the league table of countries by GDP after the US, China, Japan and Germany politicians and commentators regularly refer to the UK as a rich country. Firstly this ignores our enormous debt, both public and private. No person would be referred to as rich if their debt exceeded their income by as much as ours does. But more importantly this looks at the absolute level of GDP and ignores the population. China is second in the list because of its enormous population. It will in the next few years no doubt overtake the US as the largest economy. But it still won’t be rich because what matters is GDP per capita. Even at 5% a year it will have to grow for four decades at that rate to exceed the US in GDP per capita. By the same token the UK is only 23rd in the list of countries when population is taken into account.

Countries that have a higher GDP per capita include Iceland, Denmark, Australia, Sweden, Netherlands, Austria, Finland, Canada, Belgium, New Zealand and France. When per capita GDP is factored in, as it always should be, our rates of growth are generally disappointing as in contrast with most of Europe our population has been growing strongly owing to net migration. China is 68th on the list between Mexico and Saint Lucia.